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Conservative budget slashes $5.2B in spending

flaherty
Tags: Budget 2012
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Expectations of a dramatic austerity budget by the Conservative government failed to materialize. Federal Finance Minister Jim Flaherty says the 2012 budget will cut $5.2 billion in ongoing spending -- on the lower end of forecasts of $4 billion to $8 billion -- and will include no new tax increases.

And the pockets of Canadians will soon be a bit lighter, as the government announced it will eliminate the penny in the fall of 2012. The government says it's scrapping the penny because it loses money on minting it -- with the cost of making each penny about 1.6 cents. It estimates it will save as much as $11 million a year in getting rid of it.

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The government expects to balance its books by 2015 - 2016 -- one year earlier than it previously forecast -- and is more optimistic in its revenue forecasts and cost-cutting plans. The government now expects to have a surplus of $3.4 billion in 2015, rather than the $3.4-billion-deficit it forecast in November. In June of last year, Flaherty forecast he would balance the budget by 2015, but those plans were pushed back in the wake of Europe's sovereign debt crisis and signs of a weakening global and domestic economy.

Many economists say even the new, brighter outlook by Flaherty is conservative.

"When you look at the economic assumptions used in the budget, they're quite reasonable," said Craig Alexander, Chief Economist at TD Bank. "I think there is a real possibility the government will hit its [deficit] target sooner than they expect."

Avery Shenfeld, Chief Economist and Strategist at CIBC, calls the spending cuts simply an "unwinding of the growth [in spending] we saw during the recession."

The budget does promise to follow through on its plan to reduce the size of the federal government's labour force. It says it will eliminate more than 19,000 government positions -- about 4.8 percent of its total work force -- over the next three years. More than 60 percent of that reduction will come from layoffs, while retirement and voluntary packages will account for the rest.

It says the move will bring the level of management overhead more in line with the private sector.

The Public Service Pension Plan is also set for an overhaul. Flaherty says employee contributions will be raised until they match their employer's. And beginning in 2013, the retirement age for new federal employees will be raised to 65 from 60.

The Harper government has also followed through on its promise to reform Old Age Security. Under the new rules, workers will be eligible for OAS payments at 67, rather than the current 65, beginning in 2023. Workers will also be allowed -- starting in the summer of next year -- to defer OAS payments if they want to continue working.

"This not only saves the government money, but may actually incentivize people to stay in the labour market longer and help address the labour market shortage we might be facing a decade from now," Shenfeld said.

The new rules for OAS come as the average age of the Canadian population creeps higher. The government says  the number of workers for every person over the age of 65 will fall to two in 20 years, compared to seven in the 1970s when the program was first introduced. It expects the cost of OAS to grow from $38 billion in 2011 to $108 billion in 2030.

JOBS, JOBS AND MORE JOBS

The budget, called "Jobs Growth and Long-Term Prosperity" is loaded with promises to create more jobs. It is extending the temporary Hiring Credit for Small Business for one more year, changing the Employment (EI) program and increasing money for youth employment programs.

Flaherty says EI rate hike increases will be limited to 5 cents each year until the program's books are balanced. It will also table legislation that once the EI's budget is balanced, its premium will be set in seven-year intervals, with annual increases not to exceed more than 5 cents during that period.

SPEEDING UP APPROVALS FOR ENERGY PROJECTS

Flaherty says the government will expedite the approval process for resource projects, targeting what it calls a "one project, one review" mandate. Highlighting the impact that the oil sands sector has on the Canadian economy, the budget pointed to the 130,000 jobs in the sector, with some estimates saying that could rise by as much as 480,000 in the next 25 years.

"To maximize the value that Canada draws from our natural resources, we need a regulatory system that reviews projects in a timely and transparent manner, while effectively protecting the environment," Flaherty said.

The government says that delays and red tape continue to plague projects "with few environmental risks." The budget calls for strict timelines for environmental reviews and the substitution or equalizing of provincial environmental assessments with federal ones.

It also pledges $54 million over the next two years to the Major Projects Management Office, which oversees approvals for major natural resource projects.

A BEVY OF R&D CREDITS

The Conservatives are forging ahead with their goal of spurring innovation and research in Canada, even though past attempts have failed to achieve proposed targets. The budget calls for $1.1 billion over the next five years for direct R&D and another $500 million for venture capital to seed new projects.

That funding comes in the form of increased funding for Industrial Research Assistance program and more grants for internships, among other programs.

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